Liquid and Dry Bulk: Challenging times

Challenging times

During April-November 2015, major ports saw an increase of 3.3 per cent in cargo traffic, while non-major ports witnessed a decline of about 1 per cent. Overall, these numbers do not indicate any significant change in cargo volumes. However, dry bulk cargo rates have plummeted to all-time lows, whereas tanker rates are close to the highest rates that have prevailed in the past seven years.

To understand the liquid cargo market, we need to go back to 2008. In the period between July and December 2008, oil prices plummeted from $143 per barrel to $34 per barrel. Given the sub-prime crisis, the industry was expecting the downturn to last for a long period, and was apprehensive about the overall business environment.

However, from October 2009, crude prices started increasing and within two years, prices had crossed the $100 mark again. The main reason for the rise in oil prices was policy action by governments and central banks of many countries to provide a stimulus by way of increased investment. Despite this, the demand for oil did not increase proportionately. This created a situation of excess supply, and in 2014, oil prices started falling again. The present scenario of low prices is at least partly due to the fact that oil producers have not curtailed production, and there has been a situation of excess supply.

Falling oil prices have had an immensely positive impact on tanker companies. Due to the low cost of oil and higher refinery margins, the demand for tankers has increased. This led to an increase in tanker hire rates in 2015.

In 2016-17, newly built tankers are to be delivered, and this additional capacity will put pressure on tanker freight rates. Freight rates have already started declining, signalling that owners are cautious about placing new orders. At present, there are 127 very large crude carrier (VLCC) orders, adding almost 20 per cent to the present VLCC fleet. Orders have also been palced for 100 Suezmax carriers. But overall, tanker owners witnessed a fairly good 2015 with rising rising charter rates.

In order to get a comprehensive picture of the dry bulk shipping sector, mapping of the highs and lows of the Baltic Dry Index (BDI) is a good measure. Before the economic downturn of 2008, the BDI touched an all-time high of 11,500 points, but post-2008, the index dipped to a low of 650. At present, the index is at an all-time low level of 370.

The slowdown in the dry bulk sector can be traced to the changing development patterns of major trading countries such as China. An important development has been the Chinese government’s decision to switch from infrastructure-driven growth to consumer demand-driven growth. This translates into a reduced demand for steel and iron ore from China, thereby putting pressure on freight rates. Developed economies are also growing at a slower pace, which has further reduced the demand for various commodities. There was significant freight movement opportunity in India. But of late, Coal India Limited has increased domestic coal production, which will in turn reduce the demand for coal imports.

A positive development on the dry bulk vessel supply side has been that the construction of new carriers has slowed, and the average scrapping age of existing carriers has reduced to 25 years. The number of vessels scrapped in 2015 was almost double the number scrapped in 2014. These factors have led to a reduction in the supply of tonnage.

On the flip side, steel prices and scrapping rates have decreased, and shipowners are therefore hesitant to scrap existing vessels. Overall, in bulk shipping, fleet size has grown by 84 per cent since 2013, whereas cargo demand has increased by only 33 per cent during the same period. This is also putting pressure on freight rates.

To conclude, 2014-15 was not a very good year for dry bulk vessel owners, while it was very profitable for tanker owners. Since India is being projected as a fast growing economy at 7.5 per cent, and given the government’s focus on upgradation of existing ports, construction of new ports, port connectivity, coastal shipping, etc., the Indian port sector is likely to receive an impetus to a higher growth trajectory. However, much more is required in terms of changing regulations (to facilitate international financing for ships), providing adequate connectivity to ports, improving the customs clearance process, etc.

The year 2016 will be a challenging one for companies with low cash reserves, and they will require effective cash management. For others, there will be some good merger and acquisition opportunities. All businesses should aim to improve efficiencies and focus on innovations, so that they can get ahead of the competition when demand rises again. w

Based on a presentation by Captain Gary Vaz, Vice-President, Maritime, Ports, Supply Chain Optimization, Offshore, Zebec Marine Consultants and Services